UK inflation cooled as expected last month, headline inflation moderated to 3.6% from 3.8%, the core rate also dropped a notch to 3.4% from 3.5% in September, and service price inflation also moderated to 4.5%, down from 4.7%. Even though headline inflation was a touch higher than expected, this is further evidence that UK prices have passed their peak and it could be downhill from here.
Housing and household services made the largest downward contribution to the CPI index, however, food and non-alcoholic drinks made the largest upside contribution. The moderation in price growth was driven by lower gas and electricity prices, which benefitted from a favourable base effect, and changes in the energy price cap. Hotels also added to the downward pressure on prices and posted a price decline for last month.
The good news is that the energy price cap is expected to dip slightly for the first quarter of 2026, which suggests that there could be further declines in the headline rate of price growth down the line.
BOE rate cut hopes unlikely to rise further from here
Today’s report could give the Bank of England more ammunition to cut interest rates next month, although we still think that the decision will be on a knife edge, and we do not expect interest rate futures prices to change too dramatically on the back of this report. There is already an 80% chance of a cut priced into markets, and with notable hawks seemingly not willing to change their stance at this stage, even with the recent declines in prices, we think that an 80% chance of a cut is probably the peak for the interest rate futures market. Added to this, there is another labour market report and inflation print due before the December BOE meeting, which may shift the dial for rates. This could limit the immediate downside for Gilts and for the pound.
Downside for the pound capped before Budget
Expectations of a divided Bank of England is also capping the downside for the pound, GBP/USD dipped to $1.3129 on the back of this report but has since picked up slightly and is back in its recent range. The Budget is the next main driver for the pound. If Rachel Reeves’ fiscal plans do not convince the market that she has a credible plan for fiscal consolidation over the rest of this parliament, then we could see bond yields spike again and this could weigh heavily on the pound.
The pound has trended lower since mid-September, as the dollar has recovered. GBP/USD is lower by 3.5% in the past 3 months. It has stabilized ahead of $1.30, which suggests a resilience in sterling, however, this could be tested at next week’s budget.
Signs of stabilization for stocks
Elsewhere, stocks took another leg lower in the US on Tuesday and the Nasdaq fell by 1.2%, the S&P 500 also extended declines below the 50-day moving average, as momentum remains a drag on the major US bluechip indices. There were hefty losses for Amazon and Home Depot, who reported a disappointing outlook as home improvement demand starts to wane in the US. This is considered a lead indicator for the strength of the consumer, and it weighed on sentiment on Tuesday.
However, as we move into the middle of the week, there are tentative signs of stabilization, futures in Europe and the US are pointing to a stronger open for stocks, which may raise hopes for a mini recovery after four days of bruising losses for equities.
However, so far, November has been a bloodbath for risky assets. The Nasdaq is lower by more than 5%, the S&P 500 is down 3% and European stocks have suffered milder losses. Analysts are calling this a healthy pullback. Interestingly, the biggest decliners on the S&P 500 so far in November are some of the smaller tech companies and stocks linked to crypto, and not the biggest hyperscalers, although their share prices have also come under pressure.
We do not expect big moves in US stocks later today, as the focus will shift to tomorrow’s delayed September NFP print and initial jobless claims, which will be the next key driver for risk sentiment.
JPY nears intervention territory
In the FX space, the recent bout of volatility has pushed the yen towards intervention territory. It is the second weakest currency in the G10 FX space this month and is down more than 0.8% vs. the USD. This has pushed USD/JPY back above 155, its highest level since February. If we breach the highest level of 2025 so far, 158.80, then we could see the BOJ step in to stabilize the yen.
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